A document leaked to the web in November raises questions about whether multinational companies did all they could — and all they were legally required to do — to avoid participating in potential corruption in Venezuela’s electricity industry.
The document in question is a chain of e-mails between Pratt & Whitney Power Systems and ProEnergy Services. It, along with the others in that same collection of ostensible leaks, appears to show that some of the turbines eventually sold to Venezuela came from Pratt & Whitney Power Systems. At the time, that company was a unit of publicly traded United Technology Corp. (UTX), but has since been sold to Mitsubishi Heavy Industries Ltd. (7011.jp OTC:MHVYF ) and renamed PW Power Systems.
I found this interesting. Ever since 2011, when we first heard tales of Venezuelan state companies buying turbines at inflated prices, I always wondered how big companies like Pratt & Whitney, General Electric Corp. (GE), and Rolls Royce Holdings Plc (RR.L) could have gotten mixed up in this, since US law gives them a responsibility to run due-diligence checks on their local partners. In the words of Carl H. Loewenson, Jr. of big US law firm Morrison Foerster:
The simple fact is that parties should know with whom they are doing business. Companies and individuals should take necessary precautions to ensure that they have formed a business relationship with reputable and qualified third parties.
The extent of diligence that should be conducted on a particular third party is a fact-based inquiry that will vary depending on a number of factors, including the industry, the market, the type of transaction, and the historical relationship with the third party.
At a minimum, companies should understand the “qualifications and associations” of its third- party intermediaries. That is, companies should understand the business rationale for hiring the third party as well as the intermediaries’ business reputation and government affiliations. As the DOJ and SEC make clear in the Resource Guide, “the degree of scrutiny should increase as red flags surface.”